You're listening to Teip on today's show, we bring back a guest by popular demand, Mr. Ian Filmically, in over 24 years of experience in real estate, private equity startups and offshore trading as the CEO of Crown Street earns over 400 offerings with over 13 billion in commercial real estate. Today, we talk about how to value commercial real estate, how to take advantage of trends not fully priced into the market and the five best cities to invest in right now.
So without further delay, here's our interview with Ian for Muchly.
You are listening to the Investors podcast where we study the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the show, I'm your host, Dick brought us in and by popular demand, we have one of our favorite guests with us here today, and that is Ian Filmically, chief investment officer Cross-Breed, and he's with us for the sixth time.
So, first of all, thank you for joining me today here in the Investors podcast. Stay.
It's a pleasure to be back on this show. As you know, I'm a big fan of what you do, and I love coming on this show, so I'm eager for today's conversation. That sounds fantastic and Ian, as we kick off this interview, talking about the outlook for commercial real estate in twenty twenty one, let's first take a look at 2020, because it's not possible to say 2020 without talking about the coronavirus. So let's get right to it.
How did commercial real estate perform in 2020? So to begin with, the key theme for commercial real estate performance in twenty 20 was just simply unprecedented price dispersions that was driven by the effects of the pandemic. The results were either good or very bad, depending upon varying circumstances. So to begin, let's provide some context as we get into the numbers.
And I think we can look to some benchmarks for a little bit of help. I think the first is the S&P that finished twenty twenty six point two six percent. I think we can all agree that that's a fairly amazing annual performance number given where the index at midyear second is public rates. The MSCI US index captures ninety nine percent of all US rates, so it's a pretty good proxy and that was down seven and a half percent for the year. And that's an unlevel number.
And I'll get into that in a minute. So for the commercial real estate sector, when we think about private returns, there aren't really any good publicly available data for price indexing, but there are good proprietary sources of data and Green Street advisors, commercial property price index or the CPI is one of the better ones as it tracks a large sample size of private US real estate returns on an unlevel basis. So across all asset classes, Greenstreet CPI was down eight point two percent for twenty twenty.
But blending across all asset classes I think creates noise in the data because of that massive price dispersion that we witnessed in twenty twenty. So now when you break out that data by asset class, you have two types of real estate that were up across the board last year and they were industrial at nine point five percent and manufactured housing at eleven point five percent. And on the down side you have retail at negative twenty point seven percent and hospitality at negative twenty five point one percent.
And I think those numbers shouldn't surprise anyone. As we all saw, the massive distress that hit these property types throughout the pandemic still continue to do so. Really apartments, they were down a bit in twenty twenty on a blended basis, but nominally at three point four percent. But when you take these data, I think to truly get a sense of how private investors actually fared in real commercial real estate deals across the United States in twenty twenty, you need to apply additional filters.
The first is a leverage, practically all commercial real estate is leveraged to some degree, so an unleveraged analysis. I just don't think it really gives you a correct assessment of levered returns. So if we want to apply a leveraged assessment, a benchmark number, for example, I think assuming 60 percent is a decent blended assumption across all risk profiles. And when you apply a 60 percent leverage assumption to the unleveraged analysis, you create a multiplier effect of two point five.
So now let's go back and look at that Greenstreet CPI index data on a levered adjusted basis. And now we see industrial and manufactured housing spike up to nearly twenty four percent and 30 percent, respectively. So pretty strong returns on the upside and then on the downside. Well, the returns get pretty dire. You see negative drops for hospitality at fifty one point six percent. And then on the downside, you see pretty dire drops for retail. You see it hit negative fifty one point six percent and negative sixty one point six percent for hospitality.
The second filter that I think you have to apply when looking at 20 20 performance is geography, because the price dispersion that I mentioned a minute ago not only occurred by asset class, but it also really occurred by location. So to get a sense of how location affected returns, let's look at apartments. For example, as I just mentioned, apartments were down three point four percent on an unleveraged basis, or roughly eight percent on a basis across the US.
But the blend doesn't really tell the story for apartments because on the downside, locations such as New York City and San Francisco, they were hit pretty tremendously. Asset values are probably down 20 percent in those cities. So applying that 60 percent leverage assumption to that scenario, that's going to equate to a negative 50 percent return. Conversely, apartment values are up in many cities, many secondary markets. Phoenix, for example, is a great example. We saw four point four percent rent growth in that city in twenty twenty.
Pricing is up there, double digits in multiple submarkets. So if you assume a 10 percent price appreciation there, well, now you're up twenty five percent on a better basis. So take it in its totality. It really mattered what you were invested in and where you were invested when it came to estimating total returns for commercial real estate in Twin.
It's amazing whenever you went through those different classes, like how they performed, I mean, this is unprecedented. Now, Ian, he on the show, we talked about the excess of money printing and the impact it really had on asset prices. And we primarily talk about stocks. You mentioned how the S&P had performed in twenty twenty, probably something that we didn't expect to happen, giving everything that's been going on. And here we are. So how have the money printing in 2020 and also the expected money printing in twenty twenty one affected commercial real estate prices as an asset class in general?
At Crown Street, we've also been paying attention to how the debasing of the dollar is affecting the commercial real estate market, and I think the data point that really stands out to me and continues somewhat astound me is that over 20 percent of all dollars now in existence were created in twenty twenty. I'm not an economist, but I simply don't see how this much liquidity pumped into the market this fast doesn't put at least some upward pressure on commercial real estate prices over time.
And when you combine that level of injected liquidity with a telegraphed stance from the Fed holding interest rates down over the next two years, even if it is at the expense of some inflation, I think you have a recipe to suggest that will some inflation will occur even if its effects may be relatively temporary, maybe a few years or so. So let's discuss why inflation puts upward pressure on asset prices. So when we combine an inflationary scenario with a return to economic growth, you will typically see rent growth.
And as rents are a key driver for asset values, you would expect values to increase over time. And as long as interest rates remain low, we would not expect cap rates to increase much, if any at all. When net operating income of properties grows faster than cap rates, prices rise. And in fact, right now, not only are cap rates not rising, we're actually seeing them continue to compress as multiple asset classes sit at historically high spreads to the 10 year Treasury.
And you can see that over time. And you can look at data on this cap rates tend to migrate within bonds relative to the 10 year Treasury. So that spread is just it's bumped out and now that interest rates are low, but prices got to go up. So I think when you roll it all up, I expect to see upward pressure on asset prices over the next few years. It's crazy what you see going on, you mentioned 20 percent of all dollars were just created.
It really makes me think of Charlie Munger, vice chairman of Berkshire Hathaway. He used to say whenever people asking him about macro, especially at times like this, he said that if you're not confused, you'd understand what's going on. So I think that would be my disclaimer going into the next question. And throughout 2020 and again, here in 2021, we have seen many people in the commercial real estate space calling for more fiscal stimulus to provide a safety net for the market, which might seem a little counterintuitive to what we just talked about.
And also on the other side of the spectrum, we heard multiple concerns about inflation taking off, urging investors to seek hard assets. So how do you see the role of fiscal stimuli for commercial real estate investors whenever we assess our portfolio? Well, for starters, I think it's easy to understand why people in the commercial real estate sector would call for fiscal stimulus as it's absolutely good for the sector, both in terms of stabilizing operations as well as for providing a floor under values.
So let's consider both of those. First, the two rounds of stimulus in twenty twenty provided a tremendous amount of temporary relief for all kinds of commercial real estate throughout the year. The biggest beneficiaries, well, those were hotels and senior housing, as we saw the PPP loans that rolled out the middle of the year, they literally provided lifelines to those operators and they filled multiple months worth of negative operating deficits. The PPP was what we would call a direct form of support to the sector.
But from there, you also have to consider indirect forms of support. I think the biggest example of that is the six hundred dollars per week of additional unemployment benefits that were distributed throughout the year. They might not have directly benefited the commercial real estate market, but I think they definitely indirectly benefited with apartments. Is the biggest winner this money going into people's pockets? Will it help them keep paying rent? And I think that showed up in the data. So, for example, despite the fact that most analysts out there were predicting a precipitous drop off in rental collections in Q4, twenty twenty, when the time actually came, we never saw them drop below ninety three percent at the national level.
And that's according to data provided by the National Multifamily Housing Council. So continuing with multifamily, we can also see how 20, 20 stimulus provided a pricing floor under this asset classes. So continue with multifamily. We can also see how 20 20 stimulus provided a pricing floor under this asset class. With collections remaining strong in interest rates dropping when actual operators were bidding for deals out there, most of them that we talked with, they noted a feeling of what they described as paying a bit more to get a bit less.
And to me, there's this little doubt that the stimulus dollars helped ensure the stability of multifamily operations and that translated into the stability of asset prices. And finally, as we've already discussed, the massive amounts of liquidity injected into the market by the Fed in conjunction with their rate guidance supports a thesis around hard asset appreciation over the next few years. So across the board, I just think commercial real estate has been one of the winners for sure when it came to 20 20 stimulus.
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Just go to zip recruiter dotcom investors zip recruiter the smartest way to hire. Let's get back into the podcast. So going to the next question, I don't think there's any shred of doubt that we changed our habits with the coronavirus, you know, it's just not the amount of hand sanitizers that we never bought before that we are now using. It's the way we communicate. It's the way we commute or not commute to work. Like everything is just different.
So many of us have changed. And what we investors are trying to think about is what kind of impact is that had for our portfolio. We try to guess like make the right investment in figuring out how can we benefit from estimating the impact of those habits. So in your space, which habits do you think that we have changed for good in 2020? And how would that have an impact on how we'll invest in commercial real estate going forward? I think there's definitely a lot of behavioral changes that have just occurred.
I think somehow short term mid-term and long term effects, I see two primary behavioral changes coming out of covid that I do think have substantial effects on the commercial real estate market and they're in the office and industrial sectors. I would say that as we get into these two, it's hard to categorize either of them is permanent, but I do see multi-year effects. So first, let's talk about office.
The first change that I see coming is how we will use office space moving forward. I think there is enough data out there now to support the argument that companies will utilize office space differently in the years ahead in comparison to how they utilized it in twenty nineteen. And the way that I see this changing most is in the percentage of daily use by office employees. Since we clearly have a trend right now towards granting them more flexibility for how often they work in an office.
There's a bunch of research out there that's been published so far. And also we've spoken with a number of office leasing brokers around the country that are getting live dynamic, real time feedback. And I think there's a general consensus has emerged and I'm sure it's going to evolve over time. But it kind of currently looks like the following. You see about 60 percent of workers out there that when the office reopens, they want to return to it full time.
Then on the flip side, you've got about 10 to 12 percent of workers who want to remain fully remote indefinitely. And then you have that balance, that 20 to 30 percent. Now they want some form of hybrid environment. That's part of the interesting part of the story. I think there's a couple of things to note in this data. First, your pre covid, about six to eight percent of our office employees were already remote, so increasing to 10 to 12 percent.
Well, to me, that's a material change, just not necessarily a drastic one. Second, the big question immediately becomes, wow, this is a lot of change to the office environment. Does this movement spell doom for office demand in the United States? And while we don't have real evidence out there and probably won't for at least a year or so, I think the answer is no, as I see the results as being mixed on demand once things shake out.
And I think a simple example will help illustrate this.
So for starters, if we take a condensed open office format from twenty nineteen, it's tech oriented.
It's a pretty fairly dense build out. That use is going to equate to about one hundred and twenty five square feet per employee. So if we assume one hundred person office, we now need about twelve thousand five hundred square feet. How is that company.
And that's going to assume up to one hundred percent daily attendance, although we knew for the people who have those offices, that never actually happens. So now let's consider the change in use that I just discussed. If 10 percent of workers are now fully remote and 30 percent are now hybrid users, and let's assume that the hybrid users come into the office three days per week, well, now you're averaging about 80 percent of your previous daily attendance. All else equal.
So now you stop and say, well, what does that mean? That we need 20 percent less space? The answer is no. And the reason for that is that in the new hybrid office, you're going to have to repurpose at least 50 percent of that space, if not more, to accommodate your hybrid part time workers in what looks like a hotel office environment.
And when we have this hoteling environment, we have to create more space around them. And that's one hundred twenty five square feet per employee who just simply won't accomplish that.
And also, one thing that I think is that we're just simply going to need to give people some more space just to make employees feel comfortable, and I think that's a multiyear trend. So now adjusting for the new hybrid office bill that we're probably now looking at about one hundred and fifty to one hundred and seventy five square feet per employee to retrofit that same hundred employee office, taking the midpoint of that range, applying an 80 percent utilization factor to it.
As I just mentioned, it's going to translate into a need of thirteen thousand square feet. So I think you can easily move these numbers around a little bit. Different users are going to have different stresses. They're going to want more or less space. But I think my point is that the space demands of the new hybrid environment are probably going to look somewhat similar to the overall space demands of the pre covid, quote unquote, full attendance office once everything is considered and these spaces are actually built out, which we will see happen in the next couple of years.
So that's office. So let's talk about industrial. The change that I see is relatively permanent in the industrial space is the adherence to the jump our country just took in the percentage of our retail purchases coming from e commerce. And we entered 20, 20 with about 12 percent of our total sales coming from e commerce.
And then we saw 40 to 50 percent year over year growth during the pandemic saw this total percentage of e commerce sales spike up to 17 to 18 percent during twenty twenty, even hitting 20 percent, according to some sources. So, I mean, I fully expect this rate of growth to come back down to single digit levels in twenty, twenty one as we start to have a more normal lifestyle and we focus more about getting out and doing things and buying things and shipping them to our houses.
But then when you look to most research groups from there, they project a return to a roughly 10 to 15 percent year over year growth rate over the next decade. And that's going to get us all the way up to 30 percent of all retail sales occurring by e commerce by 20, 30. And so I think the key point here is that no one is expecting anything to go backwards on e-commerce sales. And that, to me, means that the vast majority of the behavioral changes that we just made in twenty twenty and how we utilize e commerce in our daily purchases while those are sticking.
And so once we apply this to the industrial real estate market, it's interesting because it means that we are now roughly undersupplied by between one hundred million square feet and two hundred million square feet. And according to JLL, we're going to need an additional one billion square feet of industrial real estate in the United States by twenty twenty five. So just a really interesting time and just overall strong underlying demand for the industrial sector. I think there's a couple of additional smaller behavioral changes that I see out there is interesting.
I think there is a revised hospitality expectations of consumers out there that may change staffing requirements as at the hotels as they really get back up and running. But I think those are minor compared to the two major changes that I see in office and industrial. So, Ian, one of the questions that I'm most excited about asking you here today is really going back to one of our early discussions. Actually, I think we quite a few times have talked about your investment thesis for the 18 hour cities and the opportunities that entail for the investors.
Now, whenever we see a shot like this happening, this is not just commercial real estate. I guess that goes for everything we are asking ourselves, has the investment thesis changed? And I know that it hasn't changed for you. If anything, you have a strong conviction than ever.
Why? Yes, I think it's interesting because as we saw 20, 20 unfold, what we saw actually happen in terms of job and population migration. It gave us greater than ever conviction around the thesis. And so I'll get into it by let's start with population migration. And I think that is we all spent time in our home sheltering in place. And 20, 20, I think it's fair to say that we all thought a lot about how we want to spend our time post pandemic and where we want to spend it.
So to me, I view the population migration data from 20 20 is arguably more strategic, maybe perhaps than in other years. I mean, in essence, if you moved in twenty 20, I think there was more conviction in your decision than somebody moving in previous years. So the actual migration data in twenty twenty, they saw people leave a lot of large markets such as California, in New York, and that population outflow on a percentage basis wasn't large, but I think it did tell a story.
And so, for example, we saw Californians depart the state last year and move to places like Boise, Phoenix and Austin amongst a bunch of other places. But those are some of the ones that received more than their fair share. And I think, for example, there's an interesting data point that popped up in November that during that month it cost eight times more to rent a twenty six foot U-Haul truck, one way from San Francisco to Phoenix than it did to rent the same truck for the opposite.
One way trip was tells you where people were going. And then that's a West Coast.
And we would look to the East Coast, you see where New Yorkers were moving?
Well, they mostly moved to Florida, as well as some other locations, such as Charlotte and Nashville. So moving on, the other thing that was really interesting to watch in twenty twenty was job migration at Crown Street. We've had conviction for multiple years around the growth of Texas and Florida and how it will translate and is translating to increased demand for commercial real estate. So for Texas, it was a winner in twenty twenty from a jobs perspective. Right.
You saw major announcements come out from companies such as CB Richard Ellis, Hewlett Packard and Oracle announcing they will move their headquarters to Dallas and Houston and Austin, respectively. As for Florida, well, we've seen a slew of financial firms such as Goldman Sachs and J.P. Morgan come out and announce that they're looking to move their major divisions, contemplating either possibly even moving their entire HQ to Miami. And so I think in many respects, covid acted as an accelerant of certain existing trends.
So when we saw some of our favorite secondary markets see strong growth, both in terms of population and job migration during the pandemic, well, that's what really gave us confidence coming into twenty, twenty one that not only are these trends still in place, they're strongly in place and we believe they are likely to continue through the next real estate cycle. So as you're talking about that, we have seen epidemic induced population migration spiking in certain markets. You mentioned also central and south Florida.
We can include the mountain region, too. And also some secondary markets seem to have been the beneficiaries of epidemic induced decision making as companies recognize change within their organization and adapt accordingly. How much of these trends are already reflected in the market and what are your expectations of that in the next few years? For both markets that are winners and losers coming out of the pandemic, the trends overall, I guess I would view them as only partially priced in.
And I think that the downside trends, well, I expect them to reach a trough and then recover faster, then what will play out in the upside trends. And so let's say let's consider both of those. So on the downside, markets such as New York and San Francisco, I think it's fair to say that they have yet to find their bottom as transaction volume mostly evaporated in these cities during twenty twenty. But I think they might find their trough as early as later this year.
Typically speaking, when downside corrections occur, they tend to do so faster than upside trends because as you know, because you have buyers that quickly step out of the way and they let the knife fall, so to speak, then when signs of stabilization occur, it's at that point that buyers will quickly step back in.
So I think that once you hit a trough, you can also see a balance come to that market relatively quickly. So the upside trends, they're different, they typically take longer to play out, and I think that's the case because they rely on the realization of things that are unknown. And I think a really interesting case study right now is is Boise, Idaho.
So in twenty twenty, we saw Idaho attract more population on a per capita basis than any other state in the US. And Boise is still a relatively small metro at about seven hundred and fifty thousand people. And why that's important is that means for the most part, it's still off the radar of major institutional owners. It's just too small. And that, to me, means that while pricing will almost certainly increase in twenty, twenty one because of the momentum that we're seeing occur here, it's probably not going to spike majorly because the capital inflows that are coming into this market tend to be smaller than those that are flowing into larger markets where the big institutions play.
And this, to me is the opportunity if you can front run those larger institutional capital flows, such a buy in now and then later this decade. See, Boysie hit the institutional radar. It's at that point that those large capital inflows will occur and you're going to see a more dramatic acceleration of appreciation.
So we see other upside trends also taking multiple years to really take shape. I think an example of one is you've got large secondary markets such as Dallas, Atlanta and Seattle. And I think over time those markets gain primary market recognition status. If they do, they're going to see new forms of capital flow into them, predominantly offshore capital. But again, I think those kinds of trends, they simply take longer to play out because they depend upon the realization of speculative factors.
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So I guess the first part of the question is whether or not that has changed. But also I know that Wall Street also created their own nest.
And what does that show? Yeah, so for starters, to my knowledge, the Green Street Advisors rankings and again, check this data recently, it hasn't really changed in terms of what they're seeing right now post pandemic. But to your point, what has changed is that in the last few months, Cloudstreet has gone through and created a top 20 consolidated markets ranking for twenty, twenty one. We're going to publish that in the month of February. And we also even broke out our top rankings of markets by individual asset types because industrial is going to have very different kinds of drivers and apartments will versus office.
Right. So as we talked about the beginning at the top of the show, like, you really do need to think about asset class and location when you want to get specific about where to invest. So to rank crossbreeds, top twenty five markets. When we went through it, we considered twenty five different factors that blend across macroeconomic and microeconomic drivers, geographic factors, market dynamics and quality of life measures. And so when we created our rankings, our top five were similar, not exactly the same as Green Streets, but our our top five markets for twenty twenty one.
Our number one, Raleigh Durham to Austin, number three, Phoenix, number four, Salt Lake City, number five, Dallas. So when we compare that to Green Street's top five markets, we concur on three of them. And we rank Salt Lake City and Dallas ahead of Denver and Charlotte. Now, we definitely like Denver and Charlotte a lot.
Those two markets came in at number 13 and number 11, respectively, in our top 20. So a little bit lower. But we definitely like those markets as well. See, great opportunity there. And aside from our favorite growing secondary markets, we're also, I think, maybe a bit unique to us ourselves. We're staking a claim to a couple of additional mountain regions. So as I mentioned, Salt Lake City, we're big fan of that market.
We see great upside growth for it in the years ahead. And as I just mentioned a minute ago, Boise, well, that came in as a top 10 consolidated market for Cloudstreet in twenty twenty one. I think that's probably a little bit different than most other institutional sources. And we even went in and ranked Bozeman, Montana, in our top ten, specifically under the strategy of multifamily development. So as I mentioned, we're in the process right now of publishing this entire twenty, twenty one marketplace outlook.
It's going to be a detailed report. It's probably 50 plus pages when it hits the street. And like I said, we're going to probably publish in the month of February. So it's not available as the date of this recording, but maybe by the time someone listens to it, it should be available. And in stock investing, ranking agencies and investment banks are typically have three different recommendations on stocks. And I do apologize for making this a bit, pop, if I could use that term.
But, you know, we we are used to hearing like it's a buy recommendation, hold recommendation or sell recommendation.
So using those terms was not a buy before the coronavirus head. And what is it by today? Yeah, so let's talk about what was not a buy pre covid and what were we cautious on and how is that maybe changed?
So to asset classes, I think, or mainly characterized by us as not a buy pre Koven coming into twenty twenty. And those were hotels and senior housing.
So for hotels at the time, even before the pandemic hit, we were getting cautious on the space as we viewed this as the asset class that is most immediately exposed to a downturn, given simply for the fact that rents are mark to market every day at a hotel. And we were also in a market cycle that was demonstrably over 10 years in existence by January 20 20. So we were long in the tooth, so to speak, on the market.
And we just we were a little bit trepidation about what hospitality was looking like coming into that year. We also saw a lot of supply stacking up in many markets. For example, my hometown of Portland, Oregon, was a good example of oversupply, hitting the market in twenty eighteen and leading to hyper supply by twenty twenty four. Senior housing. That sector also entered twenty twenty and a weakened state, primarily as a result of a spike in supply that was driven by an overestimation of the demand by that sector, and that led to a drop in occupancy levels.
So between roughly 20, 17 to 20, 20, we saw the average age of a new assisted living resident increased from eighty one to eighty three years old. So a two year swing when you're 20 years old doesn't necessarily mean a lot. But a two year swing and a demographic when you're over 80 years old is a meaningful difference. And that's going to change demand significantly on commercial real estate as it pertains to assisted living. So now, when we think about these two asset classes today, hopefully now post pandemic in twenty twenty one, I think that hotels are becoming a buy and I think senior housing is still a little bit out, but will become a buy eventually.
So hotels, obviously, they encountered more immediate distress in twenty twenty. So to me they sit much closer to their pricing trough. Right now, hotel investing is certainly high risk in early twenty, twenty one and we'll be throughout the entire year. But I do think that at an appropriate discount to twenty nineteen values, hotels can present a strong argument for opportunistic acquisitions. So now when we think about senior housing, ultimately we're going to regain our bullishness on senior housing.
We do have the baby boomer demographic that's going to drive what is called the silver tsunami is they're calling it on the street probably by about the middle of this decade. So if it were to occur in twenty, twenty one and we saw opportunities to purchase senior housing deals at significant discounts to twenty nineteen levels, that could be attractive. I think our expectations are definitely tempered for operations in the immediate term. So probably to me senior housing looks more like a buy in twenty, twenty two.
But as you know, the commercial real estate market is really inefficient. Sometimes the right deal is only going to come along once every few years or so. You might have to kind of make that decision when it's presented. One thing that we see in most financial markets is that after crisis, we see a consolidation happening. What do you expect to happen post pandemic and perhaps already today? And how do we take advantage of that consolidation happening? Consolidation is an interesting concept for the commercial real estate market and the cycle that's now emerging.
If I think about consolidation, I mostly see it coming to two asset classes, retail and self-storage, but for very different reasons. So first, for retail, I see consolidation coming to the sector as this asset class finds its footing. As we exit the pandemic and emerges from some of that distress in brick and mortar, retail is still highly relevant to our lives. I mean, like we discussed a minute ago, even by 20 30, most economists and research groups are projecting that we're still going to do 70 percent of all our purchases through brick and mortar retail.
So it's not like it's going away. And that relevancy today. And I think going forward, I think it's fair to say that it is still more heavily weighted, will be heavily weighted going forward towards grocery anchored centers, as well as what I would characterize as kind of one or two best located shopping centers in each submarket. So as a result, I say that I feel like we see opportunity in that best located center as it's going to be the location that will be able to backfill any vacancies that occurred during covered by the other surviving tenants, Post Co.
that they're going to look to improve their location. So it's to me that's those less well located centers in our cities. They might not ultimately be able to survive. And if they don't, I expect them to be repurposed into other things such as well, self storage, for example, or last mile distribution or potentially demolished and reformatted into multifamily housing. So this repurposing, that's would translate into the consolidation for the sector at the ground level and investors who buy into best located centers today at discounts to 20 19 values to the extent that they trade, because there hasn't been a lot of retail trading.
Well, I think they actually probably do pretty well. So now think about self-storage. I do see consolidation coming to that sector, but the consolidation is really more in the ownership and not necessarily the actual real estate itself, self-storage is a growing asset class. And what's interesting is that it has historically been mostly operated by what we would call mom and pop operators.
There has been a sustainable trend in place for many years that is leading to a gradual transition to institutional ownership, particularly with publicly traded rates. And I see this trend continuing in the next cycle. And it's for this reason that we often like opportunities in self-storage, where we can partner with a developer who has a live conversation going with one of the public reads translating into operating management by that read. Typically right now, keep an extra space are the two leading providers that are most active.
And once you build and stabilize that property, it's at that point that the steps in and wants to buy it for its public portfolio. You wrote a fantastic 20 21 outlook that I'll make sure to link to in the show notes, and you are talking about how you solved this year and you divided that into different asset categories within commercial real estate. One of the things that you mentioned was hotels. And you also mentioned this previously here in our conversation.
And while you also say that it's on the higher end of the risk spectrum, it's also an interesting perhaps long term opportunity that you can find. So could you please elaborate a bit more on hotels as an investment class right now? What's really interesting, as we enter twenty twenty one for hospitality, it does sit in a unique position for a number of reasons relative to every other asset class. The first is the near uniformity that we saw in the distress to the sector and 20 20 shelter in place in March and April.
It caused an 80 percent drop in occupancy levels nationwide by April 20 20. And there's a little bit of variation across geography and category. I mean, generally speaking, covid was just a massive tsunami for the sector that wiped out everything. And this means that without almost without exception, every hotel in the United States is worth less today than it was in January of twenty twenty. And that fact alone means that there is opportunity out there. Just haven't seen this kind of like uniform level of massive distress hit a market.
This is even more than we saw in the GFC.
The second thing about hospitality is the fact that while the distress was inflicted uniformly across the board, it was also just unprecedented in its level of distress. We've just never simply seen any market anywhere in the United States dropped by 80 percent level of occupancy in a month, just simply never happened before. And because that level of sector wide distress was so unprecedented to me, it suggests that the market will be highly inefficient in pricing it. So to me, that also supports the notion that there's opportunity to be found out there.
There's also a lot of risk to be found out there. So, again, to our point about why it is high risk.
And then the third thing that I think it's really interesting for hospitality is that given everything that's happened, you have an outlook that now strongly supports the thesis of a near certain recovery for the whole sector, with groups such as Green Street calling for a full recovery to 20, 19 revenue levels by around twenty twenty four.
So I personally believe that there is just a ton of pent up demand for the hospitality sector, predominantly right now in the the leisure hospitality part of the sector that will start to show up in force by twenty, twenty two. This is totally anecdotal evidence, but I think if you get out there and you talk to anybody, it seems as if one of the first things that we are all looking forward to do once we reach mass immunization is to go somewhere.
And I think we can even look at that phenomenon. Now, let's take that concept and apply it to our largest hospitality market in the United States, which is Orlando and its peak. We saw in twenty eighteen to twenty eighteen, we saw roughly seventy five million annual visitors to that market, bigger than New York. New York comes in about 50 million or Landos at seventy five. Major market. So once Disney is back up and running at full capacity in twenty twenty two, I mean, do you really think it's going to struggle to attract visitors and hordes?
I think that market snaps back fast. I think you could even hit a break, a new record in twenty three. I mean, think about all the families out there. Their kids are aging. Time is short. You got to get your kid the Disney experience before they're too old to to really get it. So I think that just like Orlando is a market to me that just comes back roaring and hospitality once everybody really feels safe to get out and move around.
So I think when we think about Green Street's data, for example, they come for full recovery in twenty twenty four. I mean, who knows? That might be a little bit conservative. We might see a full recovery by buy sometime in twenty, twenty three. There's another thing about hospitality.
There's just a bunch there. The fourth thing about hospitality is how the pandemic has turned off the spigot of new supply lenders. Totally understandably, they were simply not willing to capitalize a new hotel development in twenty twenty. So if you play this forward and understand that typically speaking, you need about two years to develop a hotel. This is going to suggest now that when we hit twenty twenty three, we're going to have a relative dearth of new supply. So now what's interesting is that if you get to the timing of when the market is really coming back and acting strong at the same time that you actually have a market that is historically now undersupplied, now you see the opportunity for some real growth and part of that year.
This is all fair to say that we are we're not yet out of the pandemic. There's still today in early twenty, twenty one, a lot of distress in the sector. It's going to continue to play out over this year. We're going to see hotels continue to fail. There's no doubt about that. So everything about hotel investing is certainly very risky right now. However, I do think that if you can find a hotel asset priced at a substantial discount to its 20 19 value and you buttress it with enough operating reserves to see it through to twenty twenty two, I think that's your potential for real upside by twenty twenty four.
Yeah, I really like you say that, and to your point about Disneyland, I planned on bringing the family to Disneyland in May and that clearly didn't happen. And all I heard sense was when are we going so completely anecdotal? But I completely agree with your assessment that once the world opens, that's probably going to be the first up now just for my family, but for so many others. And really like also in how you talked about hotels as an opportunity, I think most people would say that's the last place you want to be.
But, you know, you're comparing price with the value and not just the value today with the long term value. And I think that's so important for people to understand. There be an investor who made a killing in airlines in twenty twenty because they were selling so cheaply and people are thinking that were almost priced as they were never, ever going to fly again. Obviously they eventually would. But I want to transition into that outlook you talked about before.
Multifamily also stood out to me specifically. You mentioned New York City and San Francisco in your outlook. And you also did that previously here in the a conversation we had, because they're trading at a discount to the twenty nineteen prices. And you argue that they will bounce back perhaps by twenty, twenty four.
So could you please go through your investment thesis on multifamily. And I think what's interesting about what you just mentioned is that I think whatever we look at, any type of investing, you see recency bias show up, right? Any time something goes bad, people tend to want to extrapolate what's currently happening and then draw that out to infinity and then determine that everything is either going to be the most valuable thing ever imaginable or are going to go to zero.
And as you and I both know, that over time, that generally tends to not be the case. So I think and let me know when we think about some of the markets that were hit pretty hard in twenty twenty. There's definitely some recency bias showing up. So let's talk about New York and San Francisco. I think those are the two markets that really stand out as hit hardest during 20, 20. But now let's think about are these cities over time, they've demonstrated resiliency.
Take New York, for example. People called for the end of New York in the nineteen eighties. That's during its period of high crime. Then you go to 9/11 in New York over. It's not coming back. And then during the great financial crisis, again, it's over. In every instance, that city came roaring back and it only took a few years. So so I think it's just like betting against New York historically been a pretty bad bet.
San Francisco maybe to a slightly lesser degree.
But it's also it is a bit of a roller coaster market sometimes, but it is also demonstrated resiliency. We also have a dark period in the nineteen eighties for New York in the early 80s, things did not look good. It also bounced back really strong after the GFC. So again, these are two major cities that demonstrate resiliency. The second aspect I think about to think about these markets is you have this intersection of desirability and relative value. And so what I mean by that is that we start from like, well, New York City and San Francisco, they are desirable.
These are both world class cities. They have amazing culture. They've got amenities, they have global connectivity and they have strong intellectual capital. And those things just you just don't find that in every city. And these types of things, they don't evaporate overnight, and so now when we think about relative value, it's definitely fair to argue that both New York and San Francisco were reaching unsustainable levels of affordability. In twenty nineteen, when you have a small condo that's trading at well over a million dollars in both cities and a small studio can rent for over four thousand dollars per month, it sets a really high bar on the on the level of income that it takes to afford life there.
So if you reset real estate values now to a degree. Right. And rents down to down like 20 percent in these cities, now, these cities start to price more in line relative to other cities that have been actually surging during the pandemic. It also presents a window of opportunity. Now, if you think about from an affordability factor, if somebody was starting to feel priced out of that market in twenty eighteen, well, now they feel like they can jump in and they have what they feel like is a relative bargain.
And I think the third thing to factor to acknowledge is here is that while each city took this tremendous hit in twenty twenty, and then when you ask yourself whether the underlying factors are temporary or permanent in nature, as we discussed this recency bias, I think it's going to support the argument that they're going to be a little bit more temporary than permanent. And so considering that the pandemic hit these cities heavily, both in terms of the rate of infection and then the real estate utilization rates means, for example, New York and San Francisco, their offices hit as low as 10 percent for office utilization rate.
And when other markets were kind of trending in the 40s and then you also saw apartment dwellers flow out of both cities in fear of infection. So that makes it fully logical to see these cities. And 20, 20 is the biggest losers from a market perspective during the pandemic.
And while 20, 20 may have lingering effects in both New York and I don't I just don't see these effects as permanent. Neither city has ceased being great, in my opinion, just maybe a bit beat up, as I mentioned just a minute ago. Right. Great cities. They have resilience over time. I think that still applies here.
So as a result, I think if you could find substantially discounted asset values, either multifamily or an office in twenty twenty one, we'd be buyers in both markets. Time will ultimately tell. But I'm going to not be surprised if you see New York and San Francisco being back to full swing by twenty twenty five. So juicing either multifamily or hotel is an example, let's try to put some numbers on this. Could you be as specific as possible about how to determine and value the expected cash flows of potential deals that you see here in twenty, twenty one?
I think of those recent examples, let's use multifamily an asset as an example, I think just easier to understand. And so when we think about a private multifamily investment on Crowded Street, it's on average you can have about a five year business plan associated with it. And so that would then be the number of years that we would expect to hold the investment going in, although it's totally fair to say that the actual holding period, it could be shorter or it could be longer depending upon how things go.
So if we are acquiring an existing multifamily property, let's just use Salt Lake City, for example, one of our top five markets. In most cases, that multifamily property in Salt Lake is going to have three forms of cash flows associated with that. The first form of cash flow is going to come from distributions back to the limited partners out of net cash flow over the course of the holding period of net cash flow is really what's left over. After you collect rents, you pay all of your operating expenses, pay the mortgage, and then you also fund reserves for things like upcoming capital expenditures, maybe a roof replacement or modernizing the pool.
These distributions are typically issued on a quarterly basis and they commence after the property has been owned for a period of time, perhaps a few quarters or so. And that's at that point where the property would start to amass some excess cash. And on an annualized basis, these distributions may start out at a relatively modest level, maybe three to five percent on an annualized basis. But they tend to grow over time as properties are improved and rents increase. And when the rents increase, they often increase at a faster rate than operating and debt costs.
So let's move on to the second form of cash flow. And that is what we would characterize as a return of capital. And this can occur either at the time of a refinance or if it's not refinanced at the time of a sale of the property. If you're invested in that multifamily property in Salt Lake and you see rents at your property grow substantially, let's say that they grow at five to six percent over the first few years, that would be pretty strong.
Your net operating income will increase to the point that there is now a decent chance that the operator of that property can refinance it and return a substantial percentage of your originally invested equity to you. What's important to note here is that the refinances, they are a non taxable event, which is why they are really popular for private investors. So, for example, any time that you can invest a dollar and you can get 50 cents back maybe within three years with no tax consequence to you, you're free to reinvest that full 50 cents elsewhere and start earning a return on it while you still own your same multifamily property in Salt Lake.
And so, again, like I said, this is just an aspect of why commercial real estate is can be very attractive to private investors. They tend to want to do this repeatedly over time. And when you do it repeatedly over time, you can really generate tremendous compound the rates of return.
The third form of cash flows coming out of this private deal is going to be the profits and sale. And then as soon as the property goes well, we make money. We could lose money. Right. And that is what we call a form of return on capital. So if we sell that property, we have 50 thousand dollars invested in it. For example, when we've got some operating cash flow throughout the way, we've got to get back to the fifty thousand dollars first to get repaid our money, anything about that.
That's the return on capital in this final form of cash flow. It's going to almost invariably occur at the time of sale when the property is disposed of, funds that come out of that property after the cost of the sale and get it out. And the sponsor has calculated its profit percentage share. And then what's left over is returned to the partners, the limited partners. And typically and when we see that come out, it's typically in two installments.
You're going to see a large distribution that occurs relatively quickly after the sale and then you're going to see a smaller installment months later, kind of after all the final bills are paid and the investing entity is wound down in a normal multifamily deal that we think has some value to be created and is owned over a five year period. We might see that property deliver a mid teens annualized rate of return compounded and maybe that doesn't even need a refinance. Now, when you see this disposition, cash flow occur, that's probably going to equate to roughly 50 percent of your total net gain in that scenario, while the other 50 percent was paid out over time through those operating cash flow distributions.
So I think that's just kind of a way to think about a hypothetical scenario when you invest in a private real estate deal. Fantastic. And as always, it's been a pleasure speaking with you, I'm sure that the audience have learned a ton again from hearing from you. What can the audience learn more about you, Crüe Street, and perhaps take a look at some of those deals that you were talking about before. The easiest way to find me is to pull me up on LinkedIn and the only information on the LinkedIn platform, so it's pretty easy to find me there.
I'm happy to have conversations with investors. They pay me all the time and we chat about real estate. I always love talking deals, love talking real estate, happy to educate anybody. And and then also our website is just there's a lot of resources there. That's Cloudstreet Dotcom. We're popping up new deals every day. It's obviously free to join. You could just start checking things out. Look at information. We always say the first thing to do when you come on a crowded street and join is just to start reading some information and get up the learning curve.
Private equity investing can be pretty exciting. It can also be a little bit daunting going in. But I think if you kind of take it a step at a time, you can start getting really further up the curve pretty quickly and get to the point where making an investment makes sense. Absolutely amazing. Ian, thank you so much for taking time out of your schedule to speak with me here today. Thank you so much. It's an absolute pleasure to come on again.
Look forward to doing it again in the future. All right, guys, so we'll let you go. Make sure to subscribe to the Restudy Billionaires Feed. This was the sixth time we had the infamously answer.
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